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Weak retail sales add to rate cut call -

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ELEANOR HALL: The likelihood of an interest rate cut tomorrow is rising with more evidence this lunchtime that Australia's economy is slowing.

The latest numbers show problems in the key areas of retail, manufacturing and employment.

The Reserve Bank board will hold its final meeting of the year tomorrow and most economists expect it to cut the cash rate to its lowest level since the height of the global financial crisis.

Joining us now is our business editor Peter Ryan.

So Peter what is this new data out today that could influence the RBA board?

PETER RYAN: Well Eleanor, there's a deluge of data from the ABS out this week, but the big one today is retail sales which have flat-lined in October, coming in at 0 per cent after expectations of growth of about half a per cent.

So this is more evidence that the consumer is very, very cautious at the moment, and very shortly I suspect we'll be hearing from retailers demanding a rate cut to uninvite the Grinch from Christmas.

Also today, the Australian Industry Group's performance of manufacturing index has fallen for the eighth month, down 1.6 points to 43.6 points in November - anything below 50 points is a contraction. This time, food and beverages were the only sub-sector to expand.

And a sign of the current difficulties is that the food manufacturer Rosella perhaps best known for its tomato sauce has been placed into receivership today.

The Ai Group's chief executive Innes Willox says, among other things, a rate cut is needed to deal with the persistently high Australian dollar.

INNES WILLOX: We're now at a new normal of sort of between $1.03 and $1.08, which makes the competitiveness very difficult. It may be that there are some signs that there may be some easing of the dollar in the year or so ahead, but that hasn't happened yet and we've now had a $1 at well over parity now for most of this year, which has put a lot of pressure on local industry here to compete.

And then under that are a whole range of other factors, particularly related to increasing energy costs, plus also the global economy is very weak at the moment, and there's a lot of uncertainty and all of this is weighing on the sector at the moment.

ELEANOR HALL: That's the Ai Group's chief executive Innes Willox.

So Peter given this, how likely is it that the Reserve Bank board will cut rates tomorrow?

PETER RYAN: Well before we saw those retail figures, financial markets were already factoring in an 80 per cent chance that the cash rate would be cut by a quarter of a percentage point tomorrow to 3 per cent.

Nineteen of the 28 economists polled by Bloomberg think that's a pretty safe bet, so a 3 per cent cash rate would be the lowest since April 2009 after the Lehman Brothers collapse.

A big factor is falling commodity prices - the RBA said recently the resources boom will peak earlier than expected. There was also another potential clue in the minutes from the RBA's November meeting on Melbourne Cup day, when it said "a further easing may be appropriate".

So that's been taken as a signal of a rate cut tomorrow, if not in the New Year, to provide a buffer against the weakening outlook for resources activity and the economy in general.

And also keep in mind the Government's pursuit of a budget surplus involves some fiscal tightening, so the RBA might be forced to step in to compensate for that along the way.

ELEANOR HALL: So what could keep the RBA on the sidelines tomorrow?

PETER RYAN: Well one factor that kept rates on hold last month was that inflation for the September quarter was slightly higher than expected and for that reason the RBA decided it was appropriate to keep rates steady in November at 3.25 per cent.

Just this morning, a private inflation gauge from TD Securities and the Melbourne Institute shows inflation fell in November by 0.1 per cent, which on the surface adds to the rate cut case. But on an annualised basis, it now at 2.5 per cent, which is right in the middle of the RBA's target band of 2 to 3 per cent.

The head of Asia Pacific research at TD Securities, Annette Beacher, is going against the consensus for a rate cut tomorrow and says there's simply no smoking gun at the moment.

ANNETTE BEACHER: I think they'll sit tight for tomorrow, they can certainly reiterate the November discussion that there is room to eat and that proved to be necessary. Leaving the cash rate at 3.25 per cent heading into 2013 does leave the RBA with plenty of bullets to face whatever 2013 holds.

That's certainly something that a lot of other central banks just don't have the ammunition and firepower, so I don't think easing the interest rate to generate a merry Christmas is necessarily the most prudent path to take.

ELEANOR HALL: Annette Beacher there, the head of Asia-Pacific research at TD Securities.

So Peter, there's also more evidence of a softening labour market - how worrying is that?

PETER RYAN: Well the closely watched ANZ job ad series out today shows the number of ads in newspapers and on the internet fell 2.9 per cent in October, that's the eighth consecutive decline, and this is important given Thursday's official employment report from the ABS, which comes after tomorrow's RBA board meeting, and that's expected to show unemployment has edged up to a slightly higher rate of 5.5 per cent, and that's something the RBA will be watching very closely.

ELEANOR HALL: Peter Ryan, our business editor thank you.